"Tariffs Are a Regressive Tax... Inflation Could Change Trump’s Policies" [Deglobalization? New Order!] ⑨

What Lies Ahead for the U.S. Economy?
Watching Inflation and Employment Amid Tariff Impacts
Recognizing a New Era of Dual Powers: U.S. and China
Need for Cooperation Among Countries with Similar Positions, Such as the EU and Japan

There is growing attention on the potential side effects of the high-tariff policy pursued by the Donald Trump administration in the United States. While inflation and employment indicators have not yet been significantly affected, some predict that if there are changes substantial enough for the American public to feel directly, the momentum behind the tariff policy could be halted. In particular, Siwook Lee, President of the Korea Institute for International Economic Policy (KIEP), expects that inflation could become the key factor steering this direction.

In an interview with Asia Economy on September 10 at his office at the KIEP headquarters in Sejong National Research Complex, President Lee stated, "Inflation is a much heavier burden for low-income groups, which is why tariffs are often called regressive taxes." He forecasted that while Trump's policy direction currently enjoys strong support in the United States, attention should be paid to variables that could emerge in the future. "Even if environmental policies do not feel tangible, price pressures are felt immediately," he added.

President Lee emphasized that, in this situation, South Korea must prepare countermeasures under various scenarios. He particularly stressed the importance of cooperating with countries in similar circumstances, such as the European Union (EU) and Japan. He also advised that South Korea should use international platforms such as the Asia-Pacific Economic Cooperation (APEC) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) to amplify its voice in the global community.

Siwook Lee, President of the Korea Institute for International Economic Policy (KIEP). KIEP

―The second Trump administration is erecting tariff barriers and reversing the order of free trade. Is this sustainable?

▲There are three factors that could serve as inflection points for the Trump tariff policy. First is the possibility of an economic slowdown or increased inflationary pressure in the United States. Recently, inflationary pressure in the U.S. has risen slightly while the job market has slowed. Although there are no clear signals yet in consumer spending, if the economic slowdown becomes more pronounced or if the effects of tariffs are fully reflected in prices, there is a possibility that the tariff policy could be partially eased.

Second is the potential ruling of unconstitutionality regarding the International Emergency Economic Powers Act (IEEPA), which is currently pending before the U.S. Supreme Court. Last month, the federal circuit court of appeals ruled it illegal, and earlier this month, the U.S. administration filed a petition for a writ of certiorari, after which the Supreme Court agreed to hear the case. The review could continue until the first half of next year at the latest. If a ruling of unconstitutionality is made, the Trump administration would need to seek an alternative.

Third is the midterm election scheduled for October next year. If dissatisfaction accumulates not only with tariffs and immigration policies but also with political scandals and various domestic policies, the situation could change in the midterms. If either the House or the Senate becomes controlled by the Democratic Party, the driving force behind the tariff policy could weaken. The direction of the tariff policy could change depending on how these three factors play out over the next year.

―Some claim that the changes in the United States have led to "deglobalization."

▲Globalization is a concept that encompasses a wide range of aspects, including politics, economy, society, culture, and technology. Depending on which aspect you focus on, it could be seen as deglobalization, reglobalization, or simply a slowdown in globalization. If we limit the discussion to trade, it is clear that globalization is retreating, even if it is not outright deglobalization. On the other hand, from a more comprehensive perspective, a new type of globalization is emerging, based on digital technologies such as artificial intelligence (AI) and intangible assets.

―If the Democratic Party takes power after Trump, will there be a change in the U.S. approach?

▲Most of the tariff policies from Trump’s first term were maintained by the Joe Biden administration. Not only the MAGA (Make America Great Again) group, but also a significant number of people support Trump’s trade, immigration, and social policies. This is largely due to the decline of the middle class and the resulting sense of relative deprivation. The proportion of the middle class in the U.S. has decreased, and their income relative to the average has also fallen. In this context, there is growing resistance to the Biden administration’s policies on environmentalism, diversity, and gender equality, which are perceived as disconnected from everyday economic concerns. Whether it is the Democratic or Republican Party, it will be difficult to resolve middle-class discontent in the short term. Both parties have exhibited a form of elitism; Trump’s is populist elitism. While his background is similar-highly educated politicians, businesspeople, Wall Street figures-he pursues populism, which is the difference. Although this is not desirable for society and the economy in the long term, it appeals to the public. Given the current atmosphere in the U.S., it is likely that the basic stance on tariffs and immigration will be maintained regardless of which party is in power.

Siwook Lee, President of the Korea Institute for International Economic Policy (KIEP). KIEP

―Even if the Republican Party wins politically, it would be difficult to sustain if the economic indicators worsen.

▲If economic slowdown or inflationary instability intensifies, a policy shift will be inevitable. In particular, an increase in the prices of essential goods due to tariffs is fatal for low-income groups. One of the main reasons Trump was elected this time was the high inflation rate during Biden’s term. If such a situation arises, even the Trump administration will have no other choice but to change its policy stance.

―Are there any indicators or issues in the recent U.S. situation that you are paying close attention to?

▲I am focusing on inflation, employment indicators, and interest rates. Inflation has risen slightly, but it cannot be said that the effects of tariffs and anti-immigration policies have been fully reflected yet. If we break down inflation into service prices and goods prices, the prices of durable and non-durable goods have not risen significantly. If there were a significant effect, goods prices would have spiked, but there are no such signs yet. In addition, I am closely monitoring employment indicators, which are key lagging indicators for assessing the economy, along with interest rates and exchange rates.

―There are various opinions regarding relations with China. Some argue that we should distance ourselves from China.

▲In March, the China Development Forum, hosted by the Chinese government, was held. It is the largest forum held in China. Government officials, including Premier Li Qiang of the State Council, explained Chinese policies, and global CEOs discussed how they would invest in China. About 70 global business leaders attended, including Tim Cook, CEO of Apple, and Lee Jaeyong, Chairman of Samsung Electronics. This demonstrated that, despite pressure from the U.S. government, China remains an important market and companies intend to continue investing there.

We still vaguely think of ourselves as supplying intermediate goods while China handles assembly, believing that their technology level is low. However, China already possesses many technologies and industries that are ahead of ours. It is time to recognize that, rather than viewing the U.S. and China as a central and peripheral country respectively, both are now central nations in global diplomacy and economics. With the U.S., it is appropriate to further strengthen alliances, including with Japan, in terms of security and technology, while with China, we should consider how to build a strategic partnership based on mutual respect in the economic sphere.

―What is your outlook on tariff negotiations among the United States, Canada, and Mexico?

▲Canada and Mexico may appear to have high tariff rates on the surface, but due to the tariff-free conditions under the United States-Mexico-Canada Agreement (USMCA), their effective tariff rates are lower than ours. The time for renegotiating the USMCA is approaching, and during this revision, the U.S. may demand significant concessions.

―What are some international cooperation strategies to respond to U.S. isolationism? How can we amplify our voice in the international community?

▲Last month, the 32nd Pacific Economic Cooperation Council (PECC) General Meeting, an APEC event, was held in Seoul. James Robinson, a professor at the University of Chicago and last year’s Nobel laureate in economics, was invited as a special speaker. At the event, Professor Robinson suggested that countries excluding the U.S. have two alternatives. First, they could rebuild the global free trade system among themselves, excluding the U.S. Second, they could acknowledge the political and economic realities within the U.S. and create a new form of international cooperation that includes the U.S.

The first alternative is already being considered by many countries, while the second has not yet been concretely envisioned. We should keep both options open and carefully consider our approach. Professor Robinson also suggested that many countries could use international platforms like APEC to discuss these issues together. There are few international platforms as open as APEC, where high-level officials can meet regularly and heads of state can also gather. Coincidentally, this year, South Korea is the chair country for the APEC summit. Even if these discussions do not take place immediately, it would be wise to keep the possibility open. Using APEC to make our voice heard would also be beneficial.

Siwook Lee, President of the Korea Institute for International Economic Policy (KIEP). KIEP

―If the first alternative is pursued, wouldn’t the EU be the only possible leader?

▲For a group to be effective, it must include not only the top country but also the second and third. It is important for not only the EU but also Japan and South Korea to cooperate. This is about collaboration among countries in similar positions. Since these countries face similar trade challenges with the U.S. and have comparable economic structures, cooperation among them is extremely important. Internationally, South Korea is regarded much more highly than most Koreans think. People often ask why South Korea is not taking a more active role.

―Isn’t the second alternative proposed by Professor Robinson unrealistic?

▲The second alternative means abandoning the World Trade Organization (WTO) system and moving to an entirely new governance structure that includes the U.S. The U.S. accounts for about 20% of global GDP, but its consumption scale is much larger. In terms of nominal consumer markets, even combining China and the EU does not match the U.S. market (30%). In reality, it is difficult to give up the U.S. market. Moreover, the U.S. has traditionally been a strong market for us. We have no other choice but to accept this reality.

―It seems to be an era of upheaval.

▲It is very similar to the early 20th century. Back then, the upheaval ended in war, but now we are experiencing a different kind of conflict. Five great transformations-technology, energy, industry, population, and trade-are occurring in similar ways now as they did then. The technological transformation at that time was the shift from steam engines to internal combustion engines; now it is digital and AI. For energy, it was the transition from coal to oil; now it is a move toward eco-friendly and renewable energy. In terms of industry, the process back then was the completion of the shift from agriculture to manufacturing; now it is a shift from manufacturing to services. The population transformation then involved concerns about population explosions and high levels of immigration; now, it is about population aging and related immigration issues. In the early days, many people emigrated to the New World. As for the trade order, a new hegemonic power is emerging: it was Britain, then Germany, then the United States. Now, Japan has grown, and China is rising. From the perspective of these great transformations, the similarities are striking.

―The government has announced it will consider joining the CPTPP.

▲It is always beneficial to join as many networks as possible where countries are working to maintain a multilateral trade order without the United States. The CPTPP is large in scale, and even China is reportedly joining. Actively participating in such mega CPTPPs, mega FTAs, or plurilateral and multilateral agreements would be effective. However, there is some uncertainty now that Shigeru Ishiba has resigned as Prime Minister of Japan, who had been proactive. If Japan shifts further to the right, it could try to obstruct our accession. Nevertheless, from the broader perspective, considering joining the CPTPP is a positive move.